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Moody’s downgrades District 833's credit rating

Concerns over declining general fund reserves and the size of its debt prompted a key credit rating agency to downgrade District 833’s credit rating.

Moody’s Corporation took South Washington County Schools’ bond rating down two notches, from the Aa1 rating to Aa3. The downgrade applies to all borrowing efforts the district makes for at least the next three years, beginning with about $20 million in new bonds issued last week during a District 833 School Board meeting.

The district’s financial adviser for borrowing projects said the downgrade is considered significant.

“A two-notch downgrade is not common,” said Jodie Zesbaugh, a financial adviser with Ehlers Financial Advisers.

The downgrade was announced at Thursday’s District 833 School Board meeting prior to a vote on the sale of two bonds – one for $14.8 million that will pay for capital improvement projects, the other for $5.67 million that will fund additional capital projects.

After the meeting, Zesbaugh stressed that in spite of the downgrade, the district was insulated by the state’s higher credit rating – which superseded 833’s underlying rating – and a favorable market for municipal bonds.

“They were able to achieve very favorable rates,” Zesbaugh said. “We don’t know how that will look two years from now.”

She added that agencies like Moody’s like to see at least three years’ worth of improvement before an upgrade is considered.

According to a report issued by Moody’s analysts, the downgrade was precipitated by – among other things – a decline in the district’s general fund reserves, which are forecast to diminish further. That trend started in 2010, when 833 began tapping its reserves in response to a stagnation in state aid, the report states.

Moody’s expressed concern that the district’s 6.1 percent of reserves in 2013 was “narrow,” but issued greater worry about the outlook. The predicted number – which Zesbaugh said should be optimally be between 20-25 percent – could shrink to 5.2 percent by 2015.

South Washington County Schools management told Moody’s that amount could fall below the district’s minimum in 2015 or 2016, “which would require the district to make budgetary changes to rise above the limit as outlined in the policy,” the report states.

The district requires a minimum of 5-9 percent in reserves to be set aside. District policy lays out a mix of options to be taken if reserves fall below 5 percent, including implementing cost containment measures, finding new revenue and turning to voters for additional funding through a referendum.

The state’s contribution to the district will play a big role in whether 833 stays above that 5 percent minimum as it heads into 2015-16, said South Washington County Schools Finance Director Aaron Bushberger.

“We’re encouraged by the positive signs at the state level,” he said.

School Board Chairman Ron Kath suggested that despite the downgrade, “we are considered a very stable district in (Moody’s) mind.”

Zesbaugh replied that his summary may no longer be true.

“I think that had been the case, yes,” said Zesbaugh, who previously worked as the district’s finance director for 15 years before joining Ehlers, which consults the district on bond sales.

Also in play is the liquidity of funds in the district’s “internal service fund,” which is used to pay out post-retirement benefits. That account held $23 million in 2013, but is expected to shrink to $12 million by 2015 as the district also uses it to fund a new high-deductible insurance plan.

If the district leans harder on the fund, it could portend additional impacts, according to the analysts.

“Significant draws on reserves beyond current expectations could result in downward pressure on the district’s credit rating,” the report states.

The report also listed 833’s debt burden as a factor in the downgrade. The amount of debt South Washington County Schools carries is above average and capacity concerns at several of its buildings could lead to additional borrowing, according to the report.

Zesbaugh noted that despite the downgrade, the new Aa3 rating is still “a strong rating relative to other districts with a Moody’s rating in the state of Minnesota.”

There is a lower rating – A1 – which is where the majority of Minnesota districts are rated. Until the downgrade, 833 had been among seven with Aa1 ratings – just beneath the highest rating, which just three Minnesota districts had achieved as of January.

“The district certainly has some positive financial indicators,” Zesbaugh said, listing voter levy support and the state’s strengthened financial condition. “All indications going forward seem to be more positive.”

Mike Longaecker is the regional public safety reporter for RiverTown Multimedia. His coverage area spans St. Croix and Pierce counties. Longaecker served from 2011-2015 as editor of the Woodbury Bulletin. A University of Wisconsin-River Falls graduate, Longaecker previously reported for the Red Wing Republican Eagle and for the Forum Communications Minnesota Capitol Bureau.
You can follow him on Twitter at @Longaecker